Helen Bagley Brief

8/2/2019 Helen Bagley Brief

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IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Appeal No. 11-17021

SECURITIES EXCHANGE COMMISSION,

Plaintiff/Appellee,

vs.

1st GLOBAL STOCK TRANSFER, LLC; HELEN BAGLEY,

Defendants/Appellants.

Appeal from the United States District Courtfor the District of Nevada

D.C. No: 2:08-cv-00437-LRH-RJJ

REPLY BRIEF OF APPELLANTS, MARK S. DZARNOSKI, ESQ.

GORDON SILVER

Mark S. Dzamoski, Esq.Nevada Bar No. 3398

Email: [email protected]

3960 Howard Hughes ParkwayNinth Floor

Las Vegas, Nevada 89169Tel. (702)796-5555FAX (702)369-2666

Attorneys for Defendants/Appellants

1st GLOBAL STOCK TRANSFER, LLC; HELEN BAGLEY

Case: 11-17021 04/17/2012 ID: 8143124 DktEntry: 35 Page: 1 of 24



TABLE OF CONTENTS

TABLE OF AUTHORITIES ............................................................................. 2

CORPORATE DISCLOSURE STATEMENT................................................ 3

I. SUMMARY .................................................................................................. 4

II. ARGUMENT ................................................................................................ 7

A. PLAINTIFF'S COUNTERSTATEMENT OF THE ISSUE

IS WRONG......................................................................................... 7

B. THE NECESSARY PARTICIPANT AND SUBSTANTIAL

FACTOR TESTS WERE CREATED TO CATCH WILLING

PARTICIPANTS IN UNREGISTERED OFFERINGS NOT

TRANSFER AGENTS DOING THEIR JOBS............................... 8

C. GENUINE ISSUES OF FACT EXIST AS TO WHETHER

DEFENDANTS WERE SUBSTANTIAL PARTICIPANTS IN

AN UNREGISTERED OFFERING .............................................. 11

D. GENUINE ISSUES OF FACT EXIST REGARDING

DISGORGEMENT .......................................................................... 16

III. CONCLUSION ........................................................................................... 18

CERTIFICATE OF COMPLIANCE PURSUANT TO FED. R. APP.P.

32(A)(7)(C) AND CIRCUIT RULE 32-1 ................................................. 19

STATEMENT OF RELATED CASES PURSUANT TO CIRCUIT RULE

28-2.6 ............................................................................................................ 20

CERTIFICATION REQUIRED BY BAP RULE 8010(A)1-(B) .................. 21

PROOF OF SERVICE ..................................................................................... 22

1




TABLE OF AUTHORITIES

Cases

Anderson v. Aurotek, 774 F.2d 927, 930, Fed. Sec. L. Rep. P 92,377, 3

Fed.R.Serv.3d 177 (9th Cir. 1985) ....................................................................... 1 1

Ballew v. A .H. Robins Co., 688 F.2d 1325, 1327-28 (11th Cir.1982) .................... 1 1

Eid v. A laska A irlines, Inc., 621 F.3 858, 868 (9th Circuit, 2010) ........................ 12

Geiger v. S.E.C., 363 F.3d 481, 361 U.S.App.D.C. 45, Fed. Sec. L. Rep. P 92,732

(C.A.D.C.,2004) .................................................................................................... 9

Gorman v. W olpoff & A bramson, LLP, 584 F.3d 1147, 1157 (9 th Circuit, 2009)...12

In re Homestore.com , Inc. Sec. Litig., 347 F. Supp. 2d 769 (C.D. Cal. 2004) ...... 1 1

In re Swine Flu Products Liab. Litig., 764 F.2d 637, 641 (9th Cir. 1985) ............ 1 1

Owen V. Kane, 48 S.E.C. 617, 620 (1986), aff d,842 F.2d 194 (8th Cir. 1988) ..... 8

SEC v. Friendly Power Comp., LLC, 49 F. Supp. 2d 1363, 1371 (S.D. Fla. 1999) 9SEC v. Rogers, 790 F.2d 1450, 1456 (9th Cir. 1986), ....................................... 9, 10

S.E.C. v. Spongetech Delivery Systems, Inc., Slip Copy, 2011 WL 887940(E.D.N.Y.), Fed. Sec. L. Rep. P 96,246 (E.D.N.Y.,2011) .............................. 9, 10

Regulations

Securities Exchange Act of 1933 ............................................................................. 4

2








Appellants' Opening Brief and Plaintiff's Answering Brief clearly place the

matter before this Court in its proper context. The undisputed facts are the

following:

1. John Edwards and Urban Casavant masterminded a "pump and

dump" scheme to defraud in connection with the offer and sales of securities

of CMKM Diamonds, Inc. ("CMKM").

2. 1stGlobal was the transfer agent for CMKM and Bagley was 1st

Global's principal.

3. 1stGlobal issued stock certificates bearing restrictive legends

upon CMKM's instruction.

4. CMKM hired attorney Brian Dvorak to write opinion letters

stating that the restrictive legends were no longer required pursuant to Rule

144(k). Later, upon the request of 1 stGlobal and Bagley for CMKM to

provide a second legal opinion as to the validity of the issuance of

unlegended shares, CMKM hired D. Roger Glenn and the law firm Edwards

& Angell to provide opinion letters. These letters were given to 1st Global

and Bagley.

5. In reliance upon the opinion letters of both Dvorak and Glenn

and upon the directives of CMKM, 1stGlobal cancelled the certificates

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bearing the restrictive legends and reissued shares without restrictive

legends.

6. Casavant, Edwards and other defendants (not 1 stGlobal or

Bagley) subsequently sold the unrestricted shares.

Based solely upon the above and foregoing undisputed facts, Plaintiff argues that it

is entitled to summary judgment finding that 1stGlobal and Bagley are, as a matter

of law, "necessary participants" and "substantial factors" in an illegal distribution

of unregistered securities.

Appellants assert that absent an adverse finding of knowledge of the

unlawfulness of the distribution and/or active participation in an unlawful scheme

to defraud, a transfer agent is not a "necessary participant" and "substantial factor"

in an illegal distribution of unregistered securities. Plaintiff does attempt to hedge

its bet with the Court by arguing certain facts, which it maintains demonstrates 1st

Global and Bagley should have known that an unlawful distribution was occurring.

However, 1 stGlobal and Bagley have introduced sufficient evidence and argued

sufficient inferences therefrom where a reasonable fact finder could determine that

they had insufficient knowledge to be considered a "necessary participant" and/or

"substantial factor" in the unregistered distributions. Plaintiff has not sustained its

burden on summary judgment to demonstrate, as a matter of law, the factors

relevant to such a determination.

6






concluded that Defendants were attempting to graft a scienter requirement into

Section 5 and/or use reliance on opinion of counsel as an affirmative defense.

The central question at issue in this appeal is whether the District Court was

correct in finding, as a matter of law, that a transfer agent is a necessary participant

and substantial factor in an unregistered distribution of securities merely for

performing its duties in removing restrictive legends from certificates upon request

of the issuer and in reliance upon opinions of counsel. If some knowledge

component is required, the existence of red flags stacked against reliance on

opinion letters and direct testimony of Bagley denying knowledge of an illegal

distribution creates a genuine issue of material fact because reasonable minds

could differ regarding what Defendants knew or should have known.

B. THE NECESSARY PARTICIPANT AND SUBSTANTIAL FACTOR

TESTS WERE CREATED TO CATCH WILLING PARTICIPANTSIN UNREGISTERED OFFERINGS NOT TRANSFER AGENTSDOING THEIR JOBS

Not everyone, in the chain of intermediaries between a seller of securities

and the ultimate buyer is involved sufficiently in the process of distribution to

make him responsible for an unlawful transaction. Owen V. Kane, 48 S.E.C. 617,

620 (1986), aff 1

d,842 F.2d 194 (8th Cir. 1988). The necessary participant and

substantial factor test was developed to provide some rational basis to determine

who, outside of a direct seller, could be liable for violations of Section 5. As set

forth in Appellants' Opening Brief, "substantial" participation" is a concept

8




without precise bounds but generally includes "one who plans a scheme, or, at the

least, is a substantial motivating factor behind it." SEC v. Rogers, 790 F.2d 1450,

1456 (9th Cir. 1986). A person who has not had individual contact with the

purchasers of unregistered securities may be held liable as having "indirectly" sold

the security if the person has "employed or directed others to sell or offer them, or

has conceived of and planned the scheme by which the unregistered securities were

offered or sold." SEC v. Friendly Power Comp., LLC, 49 F. Supp. 2d 1363, 1371

(S.D. Fla. 1999).

Even in its own Answering Brief, Plaintiff acknowledges that "it is common

business practice to obtain an opinion letter from the issuer's counsel advising the

transfer agent that the requirements for an exemption from registration have been

met. (citations omitted)." [Answering Brief at pg. 13]. In Geiger v. S.E.C., 363

F.3d 481, 361 U.S.App.D.C. 45, Fed. Sec. L. Rep. P 92,732 (C.A.D.C.,2004), one

of the active participants in the unlawful distribution claimed that he should not be

liable for the sale because he relied on the transfer agent's determination that the

shares were unrestricted. The court found the SEC's characterization of this

argument as "disingenuous" to be "generous" precisely because the transfer agent,

as in the case sub judice, relied upon opinion letters which the transfer agent did

not know contained false information. Id. at 486.

In S.E.C. v. Spongetech Delivery Systems, Inc., Slip Copy, 2011 WL 887940

9




(E.D.N.Y.), Fed. Sec. L. Rep. P 96,246 (E.D.N.Y.,2011),filed after Plaintiff

brought this action, the transfer agent issued over 922 million Spongetech shares

based upon ninety-two opinion letters from one attorney, 12 million shares based

upon four opinion letters of another attorney and an unknown number of shares

based upon 216 opinion letters that were forged. As with every reported case

before Spongetech, supra., the transfer agent was not even alleged to have violated

Section 5 because it relied on the general business practice of requiring opinions

authored by issuer's counsel before issuing unrestricted shares. In finding one of

the two attorneys to be "substantial participants" in the unlawful distribution, the

Spongetech court noted that said attorney "did not have a sufficient basis to issue

the opinion letter and was reckless in doing so." Id. at 17. Thus, even in

determining whether the lawyer drafting the opinion letter was a "substantial

participant" in an unregistered offering, the Spongetech court looked for a

knowledge and/or recklessness component.

To assert that a transfer agent is a "substantial participant" in an unregistered

offering simply because of the number of shares it issued is clearly a departure

from existing law as set forth in SEC v. Rogers, supra. One wonders how a

transfer agent could ever know the threshold of permissible shares that it could

issue without fear that the SEC would view him/her as a "substantial participant."

Apparently, the issuance of 500,000 unrestricted shares is permissible (i.e. Geiger,

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supra.). So, too, is the issuance of 922 million unrestricted shares (i.e. Spongetech,

supra.). Unknown is at what point Defendants 1 st Global and Bagley crossed the

line that the Plaintiff is now asserting must exist.

C. GENUINE ISSUES OF FACT EXIST AS TO WHETHER

DEFENDANTS WERE SUBSTANTIAL PARTICIPANTS IN AN

UNREGISTERED OFFERING

If this Court finds that the mere issuance of unregistered shares by a transfer

agent in reliance upon opinion of issuer's counsel is sufficient to prove "substantial

participation," Defendants concede the grant of summary judgment was proper.

However, if knowledge of the scheme and/or reckless conduct is required, genuine

issues do exist.

As set forth in Appellants' Opening Brief, whether ones role is pervasive

enough to bring him/her within the definitions of "substantial factor" and

"necessary participant" usually involves a question of fact for the jury. Anderson v.

Aurotek, 774 F.2d 927, 930, Fed. Sec. L. Rep. P 92,377, 3 Fed.R.Serv.3d 177 (9th

Cir. 1985). Similarly, whether a party knew or should have known about the

causal connection between matters is a question of fact for the jury, and when facts

conflict on the extent of the plaintiffs actual knowledge, summary judgment

should be reversed. In re Swine Flu Products Liab. Litig., 764 F.2d 637, 641 (9th

Cir. 1985) citing Ballew v. A.H. Robins Co., 688 F.2d 1325, 1327-28 (11th

Cir.1982). See also In re Homestore.com , Inc. Sec. L itig., 347 F. Supp. 2d 769

11




(C.D. Cal. 2004) (Genuine issue of material fact existed as to whether corporate

officer, as defendant, knew or should have known of fraudulent deals used to

create positive earnings statements through his general work setting revenue goals,

precluding summary judgment in federal securities fraud case.). Further,

"summary judgment is generally an inappropriate way to decide questions of

reasonableness because the jury's unique competence in applying the reasonable

man standard is thought ordinarily to preclude summary judgment." Eid v. A laska

Airlines, Inc., 621 F.3 858, 868 (9 th Circuit, 2010) quoting Gorman v. Wolpoff &

Abramson, LLP, 584 F.3d 1147, 1157 (9 th Circuit, 2009).

In a flawed attempt to salvage the District Court's order granting summary

judgment, Plaintiff asks a series of rhetorical questions designed to make one

wonder how Defendants could not have known that an illegal distribution was

occurring. [See Answering Brief at pages 53-54]. These rhetorical questions

might be very appropriate in a closing argument to the jury. These rhetorical

questions invite the listener to draw an inference as to the level of knowledge of

Defendants regarding an unlawful, unregistered distribution. However, Plaintiff is

not entitled on a summary judgment to have these inferences made in its favor.

The short answer to the question "how could Defendants not know that an

illegal distribution was occurring" is that Defendants demanded and received not

one but two different opinion letters of counsel telling Defendants that the shares

12




could legally be issued as requested without restrictive legend. [App. 485-487 and

491-493]. In its Answering Brief, Plaintiff does not dispute any of these

Undisputed Facts contained in Defendants' Opening Brief:

• Neither Bagley nor 1 st Global ever removed a restrictive legend from a share

of CMKM stock and/or reissued certificates without a legend without firstreceiving the support of an opinion of counsel letter stating that certificatesevidencing the newly issued shares need bear no restrictive legend. [APP565: Separate Statement of Undisputed Facts #16]

• Neither Bagley nor 1 st Global ever made a new issuance of shares of CMKM

stock without first receiving appropriate corporate resolutions authorizing

such issuance. [APP 565: Separate Statement of Undisputed Facts #17]

• For most of 2003 and about half of 2004, the opinion letters Bagley reliedupon in determining whether to reissue certificates without restrictive legendwere written by Brian Dvorak. [APP 565: Separate Statement of Undisputed

Facts #18]

• From approximately June 2004 forward, Bagley required CMKM to submitDvorak's opinion letters to D. Roger Glenn of Edwards & Angell for review.

From that point forward, neither Bagley nor 1st

Global would reissuecertificates without restrictive legend unless they had an opinion letter fromEdwards & Angell. [APP 565: Separate Statement of Undisputed Facts #20]

• Typically, Edwards & Angell would send both the Dvorak opinion letter and

their own directing Bagley and 1st Global to reissue shares without

restrictive legends. [APP 565: Separate Statement of Undisputed Facts #21]

• After CM1KM retained Edwards & Angell, Bagley even requested Edwards

& Angell review earlier submitted opinions tendered to her by Dvorak.Bagley would not remove restricted legends based solely upon the opinionof Dvorak and requested "a letter to the effect that these [Dvorak's] opinions

are valid." [APP 565: Separate Statement of Undisputed Facts #22]

• During most of 2003 and through May of 2004, but/for the receipt of opinion letters from Dvorak stating that "[Customer name] should be now be

13




issued [Number] shares without restrictive legend, as fully paid andnonassessable" neither Bagley nor 1 st Global would have removed restricted

legends from any shares of CMKM stock and/or reissued shares withoutrestrictive legend. [APP 566: Separate Statement of Undisputed Facts #26]

• From and after June of 2004, but/for the receipt of opinion letters fromEdwards & Angell stating that "the Shares may be issued to the Shareholdersin the amounts set forth above, and that the certificates evidencing theShares need bear no restrictive legend," neither Bagley nor 1

st Global would

have removed restricted legends from any shares of CMKM stock and/orreissued shares without legend. [APP 566: Separate Statement of Undisputed

Facts #27]

The best that Plaintiff can do is argue that the opinion letters submitted by

Edwards & Angell were not really opinion letters at all since they "explicitly rely

upon Dvorak's opinion letters in support of the central determination — that the

requirements of Rule 144(k) have been met." [See Answering Brief at page 57].

This argument is meritless. Regardless of the factual underpinnings and quality of

the law firms investigation of factual predicates, the conclusion in the Edwards &

Angell opinion letters is clear: "we are of the opinion that the Shares may be

issued to the Shareholders in the amounts set forth above, and that the certificates

evidencing the Shares need bear no restrictive legend." [See App at 493]. While

acknowledging reliance on certain aspects of the Dvorak opinion letters, Edwards

& Angell also affirmatively represent that "we have examined such certificates,

certified copies of organizational and governance documents, certificates of good

standing, certifications of factual matters, company resolutions and other records,

14




pertinent documents and instruments, and have investigated such other matters of

law and fact, as we have deemed necessary for the purpose of rendering the

opinions set forth herein." [App at 492-493].

While Plaintiff wishes the Court to draw an inference, as a matter of law,

that reliance on one or both opinion letters is unreasonable, Defendant submitted

evidence to the contrary as follows:

• D. Roger Glenn (Edwards & Angell) felt it reasonable for him to rely uponthe opinions expressed by Dvorak in writing his own opinion letters

[Defendants' Undisputed Facts 29 at App 567];

• D. Roger Glenn felt Dvorak's opinion letters were valid. [Defendants'Undisputed Facts 30 at App 567];

• While D. Roger Glenn found CMKM to be a "peculiar company," he had noreason to believe the issuances of shares subject to the Dvorak opinionletters was wrongful. [Defendants' Undisputed Facts 31 at App 567]; and,

• Dvorak fully investigated the factual claims underlying the opinions set forthin his opinion letters. [Defendants' Undisputed Facts 32 at App 567].

Thus, even if Defendants parsed the opinions carefully and realized that Edwards

& Angell disclosed their reliance upon Dvorak's opinion letters, it can hardly be

said, as a matter of law, that it was unreasonable for Defendants to rely upon the

Edwards & Angell opinion letters. If a former SEC staff attorney and current well

reputed securities attorney (D. Roger Glenn) employed with a reputable firm

(Edwards & Angell) believed it reasonable to rely upon Dvorak and thought

Dvorak's opinions were valid, certainly a reasonable jury could view Defendants'

15






$300,000 from other defendants in this case and/or non-party entities that are

somehow related to or controlled by other defendants in this case. Plaintiff failed

to even show that the accounts from which fees were paid to Defendants ever had

proceeds from the sale of CMKM stock in them at all. Plaintiff offered zero proof

that the money received by Defendants is related in any way to CMKM.

Defendants acknowledge receiving only $15 per certificate issued for their

ministerial issuance of certificates.

Further, Plaintiff offers to this Court, without any evidentiary support, that

Defendants must somehow be lieing about receiving only $15 per certificate

issued. [Answering Brief at page 64]. The Plaintiff states that Defendants would

only have been paid $15 each for issuing 450 unlegended stock certificates. That

is sheer nonsense. CMKM had hundreds of billions of shares of stock that traded

in the free market. Plaintiff claims tens of thousands of investors lost over $64

million making these purchases. Defendants were paid $15 per certificate for

every certificate it issued not just the 450 unlegended certificates.

It is significant that Plaintiff does not allege that every certificate issued by

Defendants was wrongful: only the 450 unlegended certificates. Any disgogemnt

should be limited to payments received for issuance only of those 450 certificates.

If the ill-gotten gains that Defendants need to disgorge are limited to the 450

17




unlegended stock certificates as Plaintiff is suggesting, then total disgorgement

should not have exceeded $6,250.

Plaintiffs burden is to show a reasonable approximation of ill-gotten gains

received by Defendants. At a minimum, this burden requires Plaintiff to show

some rational basis for concluding that money received by Defendants is related to

the wrongful conduct. The mere receipt of some money from some defendants

and/or from non-party entities under their control provides no nexus whatsoever. It

does not differentiate between fees received for non-objectionable issuances of

CMKM certificates nor does it account for fees received in connection with issuers

unrelated to CMKM.

CONCLUSION

For the above and foregoing reasons, this Court should reverse the District

Court's granting of summary judgment.

DATED: April 17, 2012.

GORDON SILVER

/s/ Mark S. Dzarnoski

MARK S. DZARNOSKI, ESQ.

18




CERTIFICATE OF COMPLIANCE PURSUANT TO

FED. R. APP. P. 32(a)(7)(C) AND CIRCUIT RULE 32-1

Pursuant to Fed. R. App. P. 32(a)(7)(C) and Ninth Circuit Rule 32-1, the

attached OPENING BRIEF OF APPELLANTS is proportionally spaced, has a

typeface of 14 points or more, and contains 3,490 words, excluding the parts of the

Brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).


GORDON SILVER

/s/ Mark S. Dzamoski

MARK S. DZARNOSKI, ESQ.

19




STATEMENT OF RELATED CASES

PURSUANT TO CIRCUIT RULE 28-2.6

Brian Dvorak has filed an appeal with this Court (Appeal No. 11-17025).

Pursuant to DktEntry: 9, the matter is consolidated with 11-17021.


GORDON SILVER

/s/ Mark S. DzarnoskiMARK S. DZARNOSKI, ESQ.

20




CERTIFICATION REQUIRED BY BAP RULE 8010(a)1-(b)

I, Mark S. Dzarnoski, certify that the following parties have an interest in the

outcome of this appeal. These representations are made to enable judges of the

Panel to evaluate possible disqualification or recusal:

None other than those named in the appeal.


GORDON SILVER

/s/ Mark S. DzamoskiMARK S. DZARNOSKI, ESQ.

21






Leslie A. Hakala, Esq.Securities and Exchange Commission5670 Wilshire Boulevard, 1 l th FloorLos Angeles, California 90036-3648


Molly M. White, Esq.Securities and Exchange Commission5670 Wilshire Boulevard, 1 l th FloorLos Angeles, California 90036-3648


/s/ Anna DangAnna Dang, an employee of Gordon Silver


Documents

Helen Bagley Brief